The Bailout Economy: A House Built on Sand

In a very familiar parable, Jesus tells the story of two home builders. One built a house on sand, the other on rock. The house on the rock withstood the weather. The one built on sand did not fare so well: “The rain fell, and the floods came, and the winds blew, and they beat upon that house, and it fell, and great was the fall thereof” (Matthew 7:24-29).

If the parable were retold today, it might include an episode in which treasury officials and members of Congress cobbled together a bailout program for the owner and lender of the house on the sand. No matter how much money they spent, however, the ending would be the same.

Six weeks ago, when the $700 billion bailout of failing financial firms was being considered, the country was swept up in the debate. The bill, which created the Troubled Assets Relief Program (TARP), passed with thin public support. Washington claimed that the bill was necessary to keep the world from an economic Armageddon. Many people suspected that it amounted to little more than welfare for Wall Street.

Who was right? Consider the dramatic change made to the way the program works, as announced last week by Treasury Secretary Henry Paulson. He said that the government would no longer purchase toxic assets from failing institutions. It would now start giving the money directly to lenders. In other words, the entire rationale of the bailout changed overnight.

Why the change? The problem with the original idea is that it violated every common-sense rule of business. The government would pay far more than the market would bear and then, no doubt, we would watch as the market price slid to the bottom. Every time a supporter claimed that this was a good deal for taxpayers, you could almost sense the rise in deep skepticism. If you believed them, I’ve got a house built on sand to sell you.

Recent weeks have illustrated just how difficult it is to turn bad assets into good ones, and reverse the direction of downward price pressure. Short of suspending all market trading, it can’t be done. The case of the insurance giant AIG demonstrates the point. In September, the government gave AIG $85 billion. The money vanished and AIG reported more losses. Now it is expanded to $150 billion. That should last a few weeks anyway.

It seems that Paulson and others have learned a valuable lesson here. The house can’t be saved. Instead they are turning to save the lenders, a course of action which seems a bit more viable but no less a path of folly. Washington is now looking carefully at which banks to save and which to let go. This amounts to a process of picking winners and losers. It gives a competitive advantage to those institutions that were marginally worse at assessing risk.

Think about what it means for policy priorities. The lender who made possible the house on the rock does not need a bailout. That which lent money to the builder who built on sand is getting assistance from taxpayers. How does this constitute a just solution?

The pressure to continue buying bad assets, however, is not going away. Today we see demands for direct infusions of cash to auto makers, airlines, ever more insurance companies and mortgage dealers. Next we will see demands for bailouts of even such national essentials as coffee retailers. Where does it all end?

What are we being saved from here? The free market system is one of discovery, one of trial and error and one of trial and success. It is a continuous process of learning. To seek to protect those who make errors from the consequences of their choices is to distort and destroy the system itself. It is as futile as trying to save the house built on sand.

It is as though we woke up one morning to discover that failure has been outlawed, and that even if some banks do not want the money, money will be forced upon them anyway, to save them from themselves — indeed, to save them from capitalism.

We have heard many pronouncements on the vice of greed, but we need to remember that the consumerist mentality is not merely the desire to live better, but is rather the confused idea that only in having more can we be more. Some have invented a new rule of life that might be put thus: “consumo ego sum.” (“I know that I exist because I consume goods”).

How common it has become to live outside one’s means, whether it’s the huge flat screen TV we think we can’t do without or the newest automobile or the house larger than our income can afford. Then there are the imprudent risks assumed in piling up debt on mortgages with a hubris which assumed that values could only continue to rise at 10 percent or better per year

Thrift, that “handmaid of enterprise,” was mothered by scarcity, a scarcity that unregulated pricing in a free market has, better than all economic systems in human history, served best to mitigate. What an obscenity, then, that the principle of thrift should be invoked by those who oppose this system of natural rationing and allocation, preferring instead top-down systems of distribution that would bring poverty and ruin to any economy that took them seriously for any length of time.

Wall Street has been skewered and denounced in almost every attempt to examine the moral dimension of this crisis. Yet, Wall Street is too often denounced for all the wrong reasons — as a surrogate for the free economy, for seeking and making a profit, as though the alternative was somehow a preferable moral result.

No, if we are going to offer a moral critique of Wall Street, this should not be done because free markets allocate and produce capital, without which people’s homes and savings evaporate. Rather, it should be done because all these previously private businesses are now waddling up to the governmental trough begging to be nationalized and asking for their share of the dole.

It was the institution of government that unleashed those vices of greed and avarice encouraging people to build on sand. It did so by first placing a policy priority on the good idea of home ownership but pursued it with a fanaticism that neglected other goods such as prudence and rational risk assessment.

Moreover, official banking centers enjoyed subsidies that distorted that most sensitive of price signals — the very price of money — to delude both investors and consumers into believing that capital existed to support vast and extravagant consumerism when in fact such capital and savings did not exist. More sand! These tendencies to encourage consumerism and greed occurred in a market deluded by interventionism, not a market that was permitted to work within its own indigenous mechanism of risk, reward, and justice.

As we have seen so often in the past century’s experiment with socialism, the real story is in the Parable. It is a story of economic and moral folly. May we finally learn its lesson.

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Yesterday – day before? – I came across yet another ‘the free market greed done did it’ here, but now cannot locate the article. Nonetheless . . . Noelfitz, you really need to start getting your news from other than Associated Press feeds.

From the CE Money and Economics article of November 22 titled Catholic Citizens of Illinois calls for Boycott of the Catholic Campaign for Human Development let us quote:

Mary Anne Hackett, President of Catholic Citizens, commented, “It is well know that ACORN played a major role in the current financial crisis by intimidating banks through public rallies, invasions of bank lobbies with large groups of ACORN activists and picketing bank executives homes. ACORN bullied banks into making loans to people who could not repay them. To avoid vilification as racist, local banks were forced to make loans to unqualified borrowers, even allowing them to use food stamps as collateral for the loans.” These practices have caused the failure of several major financial institutions and the damage continues to reverberate through the economy.

This, in complicity with the Democratic act that started with Jimmy Carter to help low-income families secure mortgages, and turned into a force of coercion under Clinton. Eventually, these low-value mortgages were packed as securities and sold to unaware buyers. Fannie Mae and Freddie Mac were permitted (and as protected by especially Barney Frank, self-designated socialist Democrat, and Democratic senator Christopher Dodd) to buy up these mortgage securities and place the American taxpayer in jeopardy. Both President Bush and Senator McCain tried to make Fannie and Freddie more accountable, and Democrats fought them off.

‘Greedy banks’ were simply ‘greedy’, i.e., profit-securing, originally in doing their jobs of providing mortgage loans to persons responsible and able to repay. Yon Democrats, Carter to Dodd, gave us our great fall on sub-prime mortgages.

noelfitz

Does anyone else think CE is becoming too involved in politics?

God bless,

NoelFitz.
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In necessariis, unitas; in dubiis, libertas; in omnibus, caritas.
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Warren Jewell

Hmmm –

Good citizenship may not have its patron saint, though probably Saint Thomas More demonstrated that good citizenship must place God first as King of kings, or all our kings are but chaff off in the wind. Where does that leave us?

But, as well, I cannot think to carry on my Christian Catholicism outside that public square that marks our discourses on governance. For one thing, the culture of death has verily chosen most greatly and all too effectively the governace of our various communities in which to rear its ugly head against the culture of life. The ancient heretical sect from the bosom of Moloch has always been as secular – political – as it has been spiritual.

Father Sirico and the Acton Institute speak about our great ‘secular’ virtue, liberty, in relation to our religious lives. Relatedly, Christ tells us that ‘Truth will make you free’; I have to believe that we can understand and bear the more spiritual virtue of freedom as the partner-idea to liberty.

And, then, we seek liberty in truth, and we cannot get away from the how our political lives are affected by and have effects on our search for truth.

Lucky Mom of 7

Noel,

One of the reasons I read CE is for the Catholic analyses of current events. I appreciate the “involvement” in politics.

Lucky

s74748

I believe it’s very important as Catholics that we be well informed about what is happening in our government.

GaryT

I’m reminded of another parable, that of the talents. While we vilify big oil for making profits, our govt. is seriously considering handouts to big auto on account of their ineptness. Who do you suppose pays for these handouts?
“Now take two talents from the one who has ten and give them to the one who only has one. For if you are industrious with your talents we must forcibly remove them from you and give them to the undeserving servant”. Hmm, I don’t remember the parable ending that way.

Warren, an excellent analysis, although I think Republicans have been complicit in this mess too. Too much govt intervention all around.

Warren Jewell

GaryT,

Too true, that conservatism lost its principled grip on the Republicans, especially George W. Bush. He permitted every spending venture, no matter how stupid, to get his signature. If he was going to permit spending it, he should have helped Congress make efforts to secure taxes to pay for it. One reason John McCain was against the tax cuts was because he could not foresee corresponding spending cuts.

And, though I sincerely appreciate the Medicare D provisions, it will cost producing Americans for generations. Then again, the fact of Med-D may just more forcefully drive acceptability of euthanasia for serious(-ly expensive) cases.

If all this government was at more local levels, it would get more serious voter attention and greater probability of reducing government. But, the states have long been more ‘in on the take’ than conservative of either their own powers and constituent tax moneys.